Whether you’re preparing to sell your business or not, pest management professionals walk a high wire when they mix business and family. Here are some strategies to prevent your family from a fall.

When a family business succeeds, it’s a thing of beauty: father and son, brother and sister sharing in the rewards and support that only family can provide. But when a family firm goes wrong, it can go very wrong, ripping a family tree apart by the roots and leaving a mound of psychological and financial debris behind.

So how can your family avoid a disaster? Put extra emphasis on documentation, communication and professionalism, says family business expert Ira Bryck.

“Ultimately you have to treat your business like a business and your family like a family,” Bryck says. It’s a catchy slogan, but its full meaning translates into hard work and due diligence. “Treating your business like a business really means going overboard with professional structure and processes, even though your coworkers are family,” Bryck says.

Bryck worked alongside his parents for 17 years and now advises family-run firms as director of the University of Massachusetts Family Business Center. Based on his interaction with thousands of entrepreneurial families, Bryck says these strategies will keep your family and its businesses on the right path.

Above All, Be Honest.It’s easy for families to swing between being overly critical or overly forgiving with one another at work. The antidote to both ills is honest, yet tactful, communication, beginning with a realistic assessment of whether or not you can work together.

“Your family must have the ability to peacefully resolve conflict,” Bryck says. “If you don’t have the flexibility and sense of humor to be able to appreciate each other, then you are really asking for trouble. And, frankly, many families don’t have that.”

Document, Document, Document. Because the employees are mom and dad, brother and sister, families who work together often falsely assume they don’t need much documentation. But Bryck stresses that paperwork is even more important for family-run firms because when family drama creeps into the workplace, a foundation of written principles will keep everyone on the same page.

Most states require a partnership agreement, a legal contract stipulating the details of how individuals will collaborate in business and how they intend to share profits and losses among involved parties. Beyond that, Bryck suggests a family business create a partnership charter, a series of documents that stipulate the business’ vision, goals, code of conduct, employee handbook, processes and systems, emergency planning, succession planning and more.

“Lock the family in a room and talk frankly about what is expected from each family member and what the business is about. Once the major issues are agreed upon, then it’s time to put the details in writing. Then reevaluate and update those documents every year,” Bryck says.

Build A Meritocracy. The biggest issues facing a family business are how to divide the responsibilities among individual family members and how to handle compensation. It may be tempting to “keep things equal,” thinking that paying each family member the same amount will keep the peace. But that’s a recipe for mediocrity, Bryck says. Accordingly, he suggests every family business use written job descriptions with each job having a set compensation level based on the job and the free market value of the required skill set.

What’s more, compensation should be bolstered by incentives and performance-based bonuses — documented with written goals and benchmarks — so that high-achieving family members are rewarded for their successes. “This kind of documentation helps avoid miscommunication and resolve conflicts over how and why individual family members are compensated,” Bryck says.

When it comes to ownership and profit-sharing, it often makes sense to split things evenly. But with annual salary, a performance-based system is vital for keeping each family member properly motivated. Further, the sense of fairness and opportunity created by a meritocracy is crucial for attracting and retaining non-family employees as the business expands.

A Major Corporation. Families who work together often become too informal, assuming, for example, that a conversation over Sunday night dinner is sufficient for planning the work week ahead. While Bryck doesn’t object to talking shop at home, he cautions that it’s dangerous for families to ignore the formalities of a professionally run enterprise. Ultimately, the more room you leave for miscommunication, the more volatile a family firm can become.

Hold weekly staff meetings at the office, even if the “staff” is mom, dad, cousin and sister. “If Dad has an idea, he needs to write it down and add it to that week’s meeting agenda, rather than calling Junior at midnight on a Saturday,” Bryck cautions.

Seek Outside Perspective. Because it’s easy for family members to get complacent and comfortable with one another, it’s crucial to solicit feedback from outside professionals.

Family business owners should assemble a board of advisors who can periodically provide a candid evaluation of the business and its employees, without the filter of familial relationships. “And if you don’t have a board of advisors, join a roundtable at your local Chamber or business organization,” Bryck says. “And if you don’t have access to one of those, then just go out to lunch occasionally with other business owners who have an angle on something you need to know about.”

Keep Business Separate. Fortunately, Bryck says, he rarely sees a complete disintegration of the family when a family business fails. “Usually family businesses succeed or fail, rather than completely blow up. But when they do burst apart, it is usually because one party feels like he or she has been wronged and that’s when litigation ensues.”

That’s why it’s so vital to spell out key details in writing and get the buy-in, even signed agreements, from all involved family members. With every detail clear up-front, there’s much less chance for hurt feelings later on. Plus, the structure and professional culture you’ve created at the business will help minimize the impact when a family relationship hits a rough patch outside of work.

Once the parameters of the business are in place and running, make every effort to separate work time and work roles, from family time and family roles. “You really need to sit down with your family right in the beginning and formally lay out what the business is and document it. Then make it clear that love for each family member will be expressed separately from opinions about what the business needs to succeed,” Bryck says.

But be clear, Bryck warns, no matter how well you’ve structured your business, ultimately working with family requires all involved to possess an advanced level of maturity, a level head, loads of personal discipline and exceptional communication. If you can’t say that about your family, think twice about including them in your venture.

Editor’s Note: The PCT Field Guide for the Management of Structure-Infesting Ants has sold more than 30,000 copies since being introduced in 1992. Now in its Third Edition, this handy field guide — authored by renowned entomologist Stoy Hedges — has been updated to include the latest biology and control information for the most commonly encountered species of ants in North America.

Polydomous ant mounds (Photo: Gene White)Being a social insect, ants require a “home base” from which to operate. The site chosen to locate the colony is often mandated by instinct as seen with certain carpenter ant (Camponotus) species that only nest in wood, while other Camponotus species will nest in the soil beneath items. Still other species, such as C. herculeanus, begin their nest in wood and then may extend it down into the soil. Other ants, such as the pavement ant, are strictly soil nesters and will carry soil into voids when they infest structures.

It is very important to understand the specific nesting habits of structural pest ant species. Such knowledge is often a key to quickly locating the offending colony’s nest site so it can be treated. Knowing that acrobat ants prefer to nest in moisture-damaged and often rotting wood eliminates a good portion of the structure that will need to be inspected. The nests of structural ants can be divided into three basic categories: those that nest in soil, those that nest in wood and those that are opportunistic.

SOIL-NESTING ANTS.
The soil is the primary site in which most ant species locate their nests. Soil is certainly plentiful, it is easy to excavate, it contains moisture and food resources, and space is not limited. Ants move more earth by their workings than any other animal on earth, including earthworms. Therefore, ants are crucial to the success of the topsoil ecosystem. By tunneling within soil, ants bring oxygen, nutrients, and moisture down to plant roots and prevent the soil from becoming too compacted. Without ants, many forms of plant life would likely be impacted severely.

With the large numbers of different soil-nesting ant species, the types of galleries seen in the soil greatly vary. For example, Figure 1 shows the typical gallery of the small honey ant, Prenolepis imparis, which has a single vertical tunnel with branching galleries to each side where the eggs, larvae and food stores are kept. The nest of the Florida harvester ant, Pogonomyrmex badius, differs slightly as shown in Figure 2. The single tunnel may be augmented with other branching vertical tunnels and considerably more branching galleries may be present.

Other species will construct extensive underground galleries that may reach several feet into the soil, including those constructed by fire ants, Solenopsis spp., and the Allegheny mound ant, Formica exsectoides. In these species, a network of interlocking tunnels criss-cross and interconnect with each other. In many cases, the nest will be located beneath some object, such as a stone or log (Figure 3). The mounds can grow quite large in some cases: up to 2 feet (60 cm) or more in diameter with fire ants and more than 3 feet (90 cm) in Allegheny mound ants. One Allegheny mound ant colony found by the author in Ohio constructed a mound 13 feet in diameter.

Not all ant mounds will be solely composed of soil. The Allegheny mound ant, for example, may include grasses within the upper layer of the mound to create a thin, thatched layer. This layer serves to insulate the mound as well as to strengthen it. This species also incorporates soil into the mound that it may gather from as far as 100 feet (30 meters) from the nest.

The leaf cutter ants, Atta spp., may dig the most elaborate galleries of all the soil-nesting ants (Figure 4). The galleries of these nests may extend 15 feet down into the soil and contain dozens of chambers connected by tunnels. Both vertical and horizontal tunnels are present with vertical tunnels running to the soil surface and horizontal tunnels connecting the chambers. Most chambers serve as fungus gardens where the fungi on which the ants feed are grown. Other chambers house the eggs, larvae and pupae. These nests can be quite large, covering an area more than 1,000 square feet (10 square meters).

DISPLACED SOIL.
In the process of constructing nests in the soil, ants must do something with the soil. Obviously, this displaced soil composes the mounds seen around ant colonies. The shape of the mound can be unique to the ants as seen with leaf cutter ants. These ants leave the soil in crater-shaped mounds with all the soil piled on one side of the nest entrance. This behavior is also seen in the fungus-growing ants of the genus Trachymyrmex, which often can be found in lawns in Florida.

The mounds found around the nests of small honey ants, pyramid ants, and other lawn-nesting ants are typically small and form a small crater around the nest entrance. It is not uncommon to see a large number of such small mounds in a single yard.

Displaced soil is a common clue used to determine the location of ant colonies. In many cases, the displaced soil has no distinct shape and only appears as a scattered pile of soil. Although the imported fire ant is known for its dome-shaped mounds, it commonly scatters the displaced soil in irregular piles. This behavior is seen in sandy soils and where nests are located under stones or other objects or within landscape mulch. Pavement ants commonly pile up displaced soil on top of sidewalks, patios, and other surfaces next to the cracks through which they enter and exit the nest.

NESTS IN WOOD.
Carpenter ants and acrobat ants are the two types of ants most commonly found nesting in wood. Typically, the wood attacked is usually dead and contains considerable moisture and may be weakened by fungi. Carpenter ants are capable of attacking sound wood and even live wood in trees. For example, a nest in the dead wood of a tree hole may be expanded into surrounding live wood.

The wood is not eaten by these ants, rather it is deposited in bits outside the nest. The piles of “sawdust” are common at the bottom of tree holes and at the base of trees. The galleries formed by the ants are typically smooth and free from soil or mud. In some cases, in floor joists for example, the galleries will have a uniform appearance with parallel tunnels. In most cases, the galleries vary in size and shape.

Any dead wood is subject to attack, including tree limbs, tree holes, stumps, logs, landscape timbers and the structural wooden members of buildings (Figures 5a and 5b, page 66). In recent years, both carpenter ants and acrobat ants have discovered that the foam elements used in building construction are easier to excavate to create nesting sites.

A number of types of ants will nest in wood previously infested by termites and even carpenter ants. Pavement ants, acrobat ants, Argentine ants, fire ants and the large yellow ant are a few of the pest species with this behavior. The ants usually clear out the soil and other debris within the old galleries and deposit it outside the nest. The sudden appearance of piles of soil in window sills and next to door frames is often an indication of this activity.

NESTS OF OPPORTUNITY. A number of the most important pest ant species take advantage of any suitable location in which to establish all or part of a colony. For example, the Argentine ant, Linepithema humile, is basically a soil-nesting ant that constructs shallow nests within the soil, often under objects. This ant will, however, locate nests in the voids of rocks, in the spaces created by stacked items, in old termite galleries in wood, in wall voids and inside insulation in attics. It has even been found to excavate the foam elements in buildings to create a nest site.

Many other species have similar nesting habits to the Argentine ant including the crazy ants of the genus, Paratrechina; the rover ants of the genus, Brachymyrmex; the odorous house ant, Tapinoma sessile; and the ghost ant, Tapinoma melanocephalum.

Although primarily wood-nesting ants, carpenter ants are opportunistic in selecting sites for satellite colonies. Any suitable void within a structure can be utilized by satellite colonies. Colonies have even been found within appliances as small as clocks and radios. Other carpenter ant species primarily nest in the soil beneath objects while others begin nests in wood and may extend the nest into the soil.

The Pharaoh ant, Monomorium pharaonis, may well be the “king” of nest site variability. These ants have been discovered in sites as small as a Band-Aid® box in a medicine cabinet. Other nesting sites include between the folds of sheets in closets, in the hollow tubes of hospital beds, inside electronic appliances and even the voids inside an electric iron.

The ability of these opportunistic species to survive in a variety of locations is a trait that makes them ideally suited to be pests of structures. In most cases, the species that select varied nesting sites are those that exhibit extended colonies with multiple nesting sites (polydomous). The use of the nest site is often only temporary, lasting from a few days to possibly a few months. If a better site is discovered, the colony will readily vacate one site for another. Established trails connect each nest site to another, thereby linking the entire colony.

Stoy Hedges is technical director of Terminix International, Memphis, Tenn., and a frequent contributor to PCT magazine. Contact him at shedges@giemedia.com.

Did you know that only one of three businesses is able to successfully transition from the first generation to the second? And that far fewer, only 13 percent, transition to the third generation? While there are certainly success stories of family transition in pest control, the increasing odds are that your children or grandchildren will not step up to take over your business and that you will want liquidity even if they do so that your financial well being is not tied exclusively to the future success of the business.

You can start planning now to increase the probability of a successful succession, whether to your children or an outside buyer. Steps you take today to plan for your eventual exit will help you maximize your liquidity when you’re ready to cash in and leave your company poised for future success beyond your ownership and active involvement.

THREE OPTIONS FOR EXIT. The three most common exit strategies for any privately held business — outside of family succession — are a third-party sale, a private equity recapitalization and formation of an employee stock ownership plan. Each of these three strategies will enable you, the business owner, to trade a portion (or all) of your interest for cash. In this article, we will briefly detail the differences between the strategies, so you can begin to determine which path might be the best for you, your company, your employees, your family and your customers. Understanding your end game options will help you drive your company to the best position for achieving maximum value when the time is right. We’ll also give you some steps to enhance the marketability of your business so that it is attractive to potential owners for reasons well beyond its book value.

STRATEGIC THIRD-PARTY SALE.
Perhaps the most widely known of the three options is an outright sale to a third party. Usually, a third-party sale means that you, as the business owner, will sell 100 percent of your ownership interest in exchange for cash.

This type of transaction is typically referred to as a sale to a “strategic buyer.” The buyer is strategic in the sense that he is typically already active in the industry and is looking to expand his business through acquisitions. Your company must fit the buyer’s acquisition profile, likely in terms of size, geographic footprint, customer base and business mix.

While there have been numerous strategic buyers in the pest management industry over the years, certainly the two most prolific are Orkin and Terminix. These buyers are looking for good companies run by good people. While the equipment, facilities or other assets that come with the deal are important, the pest control industry’s strategic buyers are focused on your reputation, your ability to deliver the highest level of service at a competitive yet profitable rate, and your valued and valuable clients.

While the third-party sale is perhaps the quickest and cleanest way to cash out, some business owners have reservations about this strategy as a solution. A strategic buyer will look to integrate your company into his, which could lead to some loss of duplicative staff. It also can mean a loss of the brand name and corporate identity that is such a part of the culture you have built. This can be a tough pill to swallow, yet might make the best sense for achieving your personal, financial and professional goals.

PRIVATE EQUITY RECAPITALIZATION. For the owner seeking substantial liquidity, yet willing to continue to lead the business for several years, or for the owner looking for capital to grow the company, a private equity recapitalization might be best.

In a private equity recapitalization, an institutional investor, such as a private equity group (PEG), acquires an interest in the company, often with the agreement that the owner and his team will stay on to grow the business both organically as well as through acquisitions. In a recapitalization, the business owner receives substantial personal liquidity and diversification for the interests sold. Although a PEG typically acquires a controlling interest, this strategy allows the business owner to remain a significant shareholder and continue to be the driving force behind the company.

Unlike strategic buyers, PEG buyers often look to maintain the brands they acquire, realizing the value in brand recognition and the loyalty of the management, employees and clients. Therefore, post-transaction, the company likely will continue to operate under the same brand name. As financial buyers, PEGs do not want to be involved in the daily operations of the business, but rather are looking to contribute capital and other resources to help leverage the talents of the existing “best in class” team. The PEG’s goal will be to partner with the business owner to grow the company over a period of four to seven years, on average, and then sell it to generate a return to their investors. Most equity groups have well-defined strategies as to the type and size of companies they invest in, how they structure their deals and their investment time horizons.

This deal is often the best choice for an owner who wishes to get substantial liquidity off the table, yet keep their brand and their team to grow the business with continued upside and significantly lower personal risk. The best candidate companies for a private equity recapitalization will have a well thought-out plan in place to grow the business more aggressively. In a recapitalization, size matters and only larger companies will likely attract a PEG. Usually, PEG buyers are actively focused on investing in new platform companies in specific markets as well as adding on with acquisitions in their existing markets.

EMPLOYEE STOCK OWNERSHIP PLAN.
While perhaps the most maligned and misunderstood of the three, the employee stock ownership plan (ESOP) might be the only choice for some companies. It also may be the best choice for those seeking to retain and reward employees while reaping the significant tax advantages the ESOP provides.

An ESOP is another liquidity or exit strategy that allows the selling shareholder to get full, fair market value for any interest in the business that is sold, yet maintain operational control. The unique aspect of an ESOP strategy is the ability to reward employees with real ownership in the company. Further, if properly designed and implemented, an ESOP can create exceptional tax benefits for both the selling shareholder and the company. Considering the projected rise in capital gain rates in 2013, an ESOP is a timely choice for maximizing value.

The ESOP strategy is similar to the others in that the starting point is negotiating the value of the company. Once value has been established, then the company must secure financing for a loan to the ESOP. The ESOP will use the funds to purchase the business owner’s stock, which is then allocated among employee accounts in the ESOP. Over time, as the company generates profits, the loan is paid down and the employees’ ESOP stock accounts are filled with allocations of shares in the company. The ESOP can therefore serve as a qualified retirement plan for company employees, allowing them to retire with significant stock value in their ESOP account without them ever having to invest a penny of their own money.

While the tax benefits of the ESOP vary depending on a host of factors, including what type of entity you have chosen for your company, they can be substantial. With guidance from excellent advisors, this strategy can result in tax savings for the company and for the selling shareholders, helping them to avoid paying capital gain taxes on the value received from the sale of their stock to the ESOP and potentially being able to deduct the full principal and interest on the purchase.

The tax benefits and the prospect of sharing real ownership with key employees are often the driving factors in the creation of an ESOP. However, the ESOP may be the only real alternative for liquidity if a strategic or PEG buyer does not materialize with a value that represents a full, fair market return to the shareholders. Several of the industry’s 25 largest, privately held firms throughout the past 20 years have successfully implemented ESOPs as a solution for owner transition.

THE END GAME IN MIND. As a starting point for enhancing marketability, it is important to remember that the goal of any potential buyer will be the same as yours — to grow your company’s revenues and profits by increasing the number and quality of accounts, increasing efficiency of operations and decreasing unnecessary overhead. Doing so will require a nimble team of professionals committed to the company’s growth.

The ideal time to sell your company is while its prospects for continued growth and profitability are still on the rise. While you continue your goals of increased revenue and profits, positioning your company for sale requires an additional focus on shoring up your company’s infrastructure, putting an effective organizational chart to work, recruiting a best-in-class team of employees and advisors, and keeping accurate, organized and professional records. Here are some tips for transforming your business into one that could generate a bidding war among buyers.

RECURRING REVENUE. In order to get maximum value for your firm, you should ideally sell when the business is able to demonstrate both historical and projected growth.

If your profits are flat to declining and you are able to attract buyers, they will likely be the variety who want to buy it cheap. Remember that your revenue is irrelevant if you are not making any money. Growth and profitability drive value. Further, in the pest control industry, value is especially driven by ongoing and recurring revenues. While one-time, project-oriented jobs might instantly boost sales and profits, their cyclical nature, as well as issues of retention, make this segment of business less valuable from the buyer’s perspective. It is always better to have strong recurring profits in order to get the highest valuation.

BENCH STRENGTH. Potential buyers may scrutinize your team as much as they examine you, the owner. They will always think, OK, if I write this guy a big fat check and he goes off to Belize, who will run this business after closing? While the buyer might technically be buying the assets of the business, they will find the company’s real value and growth potential in the people — you, your employees and your client base. In order to push the value of your company, you must build “bench strength” by incorporating key responsible players on your team that will outlast your career with the company.

Simply put, sales grow from relationships. If all your company’s sales are built on the founder’s relationships, potential buyers will question their ability to generate comparable sales when the founder exits. You can boost the marketability of your company by institutionalizing your business development efforts and assigning sales responsibilities to other leaders within the company.

Buyers love to see a team of capable employees that can shoulder significant growth. However, we often see flat organizational charts, where everyone seems to report to the owner. This is often clear from our very first meeting with a client — the number of times the meeting is interrupted by employees seeking guidance on sales, estimating or field-oriented issues that can and should be solved by someone else, is a great barometer of how efficiently the company might run when the owner has moved on.

The transition to new ownership is less stressful on employees accustomed to effective delegation of operational responsibility. Strive to create a scalable organizational structure so that your company can run without your constant input.

INFRASTRUCTURE. While a bookkeeper and QuickBooks can get you going and last for a while, they likely won’t support your company through the sort of growth you and your buyer are expecting. Make it your goal to make your information and data work for you. Find and implement resources that your team can access with ease to create and effectuate your growth plans.

In order to grow you must employ systems, procedures and technology that will allow your company to flourish. A buyer will be attracted by smooth-running and easy to use systems. Many owners think they can skimp on this since the buyer will just plug them into their systems in the end. While that may eventually happen, buyers will discount your value if you have not built an organization of real quality.

Advisors. While you certainly do not need to go hire the most expensive accountants, attorneys and insurance advisors in your city, it is essential that you back your success with the advice of professionals who can provide full service to your growing company — today and tomorrow.

Many owners stick with their original advisors and end up outgrowing their ability to get the advice they need. While the practice of being loyal is an admirable one, you should not sell your company short with advisors who can’t continue to bring value and expertise to you. There is tremendous benefit to building a team of advisors that is skilled and experienced enough to see your company through a major sale transaction.

Further, advisors can add value to your company pre-sale by readying your corporate structure and financial records for a smooth closing. For example, an excellent attorney can help advise you on the benefits of registering as an S corporation or a limited liability company rather than a C corporation, prior to marketing your company for sale. While there are a multitude of considerations regarding corporate form, in general, C corporations introduce inefficiencies to a sale process, whereas structuring a deal for an S corporation or an LLC is far simpler. A capable accountant will help you get your financials shipshape — drastically reducing the time required to prepare your company to market. Quality corporate information and financials are absolutely key to surviving the due diligence process with your valuation intact. While you don’t necessarily need audited statements to get a deal done, maximizing value is certainly easier when a reputable third-party provider has at least reviewed your numbers and blessed them as materially correct and in compliance with generally accepted accounting principles.

An investment banker or M&A advisor can help you understand the specific components of valuation, marketability, timing of the deal (yours and the markets), and how to position your company to achieve its highest and best value. They can also work with you to help organize your results and slice and dice them at a buyer’s request.

A buyer might ask you to list your top 25 clients by revenue for the last three years, demonstrate gross and net profitability by customer, service line or branch, and demonstrate client retention over a historical period. Are you prepared to do so? Well-suited advisors can address issues early and get you prepared, removing obstacles to the sale of your company.

PERKS. You own a business. And, if you’re like most business owners, you probably enjoy the perks of being in charge — one of which includes choosing how and when to compensate yourself for all your hard work. While it is not our job to opine on exactly how business owners choose to do this, you need to know that your compensation and the perks you provide to other shareholders or family members from the company’s coffers will be scrutinized in great detail.

While we can convince a buyer to make adjustments to the value of his or her company for these perks, and thus normalize the company’s true earnings, there are limits. If the amounts are considered egregious, you will raise concerns and doubt in the eyes of a buyer. Significant personal expenses often make a buyer wonder whether there are more being hidden and how they will affect the value of the company post-sale. While you should enjoy the benefits of owning a business and not pay more taxes than you need, pushing the envelope too far will likely hurt your company’s marketability.

FINAL THOUGHTS. It is never too early to begin looking forward to your exit and planning to make it as easy and as profitable as possible. Keeping an eye on marketability, as well as value, is essential. With these goals in mind and a working understanding of the options that exist in the market, you will be well equipped to transition your company when the right time arrives.

CCG Advisors (www.ccgadv.com) is an Atlanta-based merger and acquisition firm specializing in advising owners of privately held companies on business valuation, strategic growth planning, capital alternatives and exit strategies. CCG represents business owners nationally and across all lines of industry in the sale, recapitalization or ESOP of their companies.

Brian D. Corbett is the managing partner of CCG Advisors. He can be reached via e-mail at bcorbett@giemedia.com.

There was a “massive push like I’ve never seen before,” said The Potomac Company M&A Director Paul Giannamore. He had more transactions of $5 million-plus companies wrap up in 2010 than in the last six or seven years.

National players reported as much. Terminix, always busier in the fall, saw an increase in the fourth quarter, said Fred Murray, director of business development.

Arrow Exterminators had a “significant upswing” in M&A activity, said Chief Development Officer Kevin Burns. In December, the company acquired Ponte Vedra, Fla.-based Nader’s Pest Raiders — ranked 79th on PCT’s Top 100 list with $6.2 million in revenue.

A Buyer’s Market. For the first time in 15 years, it was a “fantastic buyers’ market,” explained Joey Edwards, president of J. Edwards Services in Atlanta.

Owners were motivated: Many feared Congress wouldn’t renew Bush-era tax cuts expiring at the end of 2010. This would have pushed capital gains and personal income tax rates significantly higher in 2011.

The slow pace of economic recovery also played a role. In 2008 and 2009, pest management professionals sat on the sidelines and waited for the economy to improve. But “there comes a point where it just doesn’t make sense to wait any more,” said Giannamore.

Some professionals changed their price expectations and sold while their business had value, said Lance Tullius, a partner at Tullius Partners in Portland, Ore.

Five years ago, buyers paid $1.50 to $2 on annual revenue, said Edwards. Now, they’re paying at annual revenue or a little less depending on the recurring revenue ratio.

Big industry players had cash-rich balance sheets to make deals happen. They focused on “expansion and growth as opposed to preservation,” said Tullius. “Cash is like inventory. They have to deploy it.”

This allowed national companies, in particular, to expand their footprints and customer bases, and acquire “some really experienced talent,” Edwards said.

Rentokil North American Pest Control Acquisitions Director Alexander Nigh said activity may dip early this year because most owners considering a sale probably did so by year end, but he expects activity to bounce back. “This is an industry with thousands of companies moving slowly toward more consolidation, and we expect that trend to continue.”

Economic conditions will be a big factor. A good economy will motivate sellers who held back during the recession to move while the company’s value is better, explained Arrow’s Burns. He’s “cautiously optimistic” about the economy, though unemployment and the housing market remain wild cards.

Murray doesn’t see the economy improving any time soon, and said this will continue to create more activity.

Edwards said each year that goes by without the economy bouncing back makes it more enticing for owners to sell and perhaps finish out their careers at a large company. “I think that trend is going to continue,” he said.

The industry continues to get older, reminded Giannamore. “You’re going to start to see a lot of old-timers who’ve been hanging in there say, ‘enough’s enough.’”

According to PCT’s 2010 State of the Industry Report, 5 percent of owners said they plan to sell their pest control companies in the next one to three years, and 25 percent are undecided. On the flip side, 15 percent plan to purchase another pest control company, with 23 percent undecided.

Strategy for Growth.
Acquisitions help big players grow revenue. “If you listen to their earnings calls, there’s a real big push to buy sales,” said Giannamore.

Acquisitions played a major role in Rentokil’s growth in North America, said Nigh. When he joined the company five years ago, it had $26 million in revenue originating from 16 offices on the East Coast. Since then, Rentokil has made nearly 30 acquisitions, including regional anchors J.C. Ehrlich, Presto-X and Watch All, and has grown to $228 million in revenue with nearly 80 offices in 35 states and Canada.

In 2011, the company will “remain active in seeking out quality acquisition opportunities” that help it “strategically and thoughtfully expand our geographic footprint and service offerings” coast to coast, said Nigh.

Strong management teams at branch and regional levels will help it accomplish this. “We are always looking for good people to join our team, and acquisitions of good companies are a great way to find those people,” said Nigh.

Terminix generally targets “large, strategic regional companies” that average $2 million in revenue, but will consider larger and smaller operations, said Murray. About 95 percent of acquired accounts are tucked into the company’s branches. “The customer list is primarily what is being purchased.”

Terminix acquires 25 to 50 companies a year. Last August, it bought Antimite/SOS Exterminating, which will continue to operate as its own brand. “There’s a value there,” said Murray of the company’s long history, solid customer base and brand image in California and Arizona.

Rollins tucks in small acquisitions, transitions others over a period of three to five years, and operates larger acquisitions — Home-Team Pest Defense, PCO Services, Western Pest Services, The Industrial Fumigant Company, Crane Pest Control and its largest acquisition of 2010, Waltham Services — as separate brands. The company acquired 23 companies last year.

Plan Now for Later.
Tullius, who advised former Waltham Services owner Clark Keenan, said selling a business is an art, not a science. It’s the biggest piece of one’s financial life and it’s never too early to plan an exit strategy.

“Always be prepared to sell but run the business as if you’re never going to sell,” he said. Being prepared doesn’t detract from day-to-day operations, but enhances it. And, you’ll be in a position of strength should you receive an inquiry.

Many owners of small and mid-size companies “don’t have a clue” when it comes to exit strategies, cautioned Edwards. Likewise, those buying firms give little thought to the due diligence process and contract negotiation. “You can really get burned if you’re not careful,” he said.

He advised buyers to verify recurring revenue sources, ensure signed service agreements are in place, and carefully evaluate liabilities.

When negotiating the purchase agreement, protect your investment with a performance or charge-back provision, which allows you to offset the purchase price should revenue drop after the transaction, Edwards said. Sellers must carefully consider these provisions before signing, as they could impact their payout.

Keenan hired Tullius two years before he sold Waltham Services to fine-tune and execute his exit strategy. He’s the “poster child for how to do it right,” said Tullius.

-Anne Nagro

Private Equity is Good for the IndustryPrivate equity firms continue to set their sights on the industry and that’s a good thing, experts say.

“I think we could have some newer players in the industry in the next few years,” said Joey Edwards, president of J. Edwards Services. He’s working with private investment groups to possibly build a larger entity from three or five smaller pest management firms.

Paul Giannamore, M&A director at The Potomac Company, worked on a deal last year that received three bids from private equity firms.

They like the long-term contractual, stable revenue of the industry, he explained. “Compared to some other industries, it’s relatively resilient in poor economic times. And it’s very fragmented, so it’s a way for them to create value by consolidating,” he said.
Private equity’s biggest challenge is coming into the industry from scratch, said Lance Tullius of Tullius Partners.

They often can’t always pay owners top price like big industry players, which can justify paying more because they have the infrastructure to cut costs or accelerate growth, Tullius explained.

Private equity generally needs an owner who will sell a majority share but stay on for five or more years to grow the business with help from outside capital and expertise, said Tullius. Owners have the potential to maximize their value even further. It’s a “great opportunity for the right person.”

But not many are willing to engage in this type of deal, mainly due to the added risk and because entrepreneurs like the autonomy of working for themselves, said Tullius. Plus, private equity traditionally has targeted companies with $10 million-plus in revenue, and there aren’t many companies that size in the industry.

Wind Point Partners invested in Wilson Pest Control in 1998, and Prometheus Partners acquired Baco Exterminating in 2008. Last year, former Terminix President Albert Cantu joined Waud Capital Partners, which has aggressively targeted the pest management industry but has yet to announce a deal.

Thinking of Selling?Here’s what buyers want and how you can make your business attractive.

WHEN IT COMES TO ACQUIRING PEST MANAGEMENT FIRMS, NATIONAL PLAYERS HAVE SPECIFIC REQUIREMENTS:

Recurring Revenue. Arrow Exterminators likes companies with 75 to 80 percent recurring revenue, said Chief Development Officer Kevin Burns. “It’s a very important number to us” and is an indicator of the health of the business.

Terminix seeks a mix of termite renewals and contracted pest control with assigned service frequency, said Business Development Director Fred Murray.

“Your company’s not going to have the value if you don’t have signed service agreements,” cautioned Joey Edwards, president of J. Edwards Services.

Buyers like diversified services such as insulation, wildlife control and gutter protection, which help eliminate “revenue peaks and valleys,” he added.

Sustainable profit also is important, reminded Rentokil North American Pest Control Acquisitions Director Alexander Nigh. It’s “largely the basis of the valuations we make and thus the consideration we can pay any potential seller.”

Long Employee Tenure. Rollins Inc. wants companies with an “outstanding reputation,” continuity of management and long employee tenure, said Corporate Administration vice president Gene Iarocci. A service business is built on employees, he said. “We want to keep those employees. If they have good tenure, that’s a plus to us.”

Some of Terminix’s top executives have come through acquisitions, said Murray.

Arrow wants employees “we can add to our staff and make us better,” said Burns. “We’re not buying revenue just to build our numbers.”

Rollins builds relationships with companies “we know have an outstanding reputation in the marketplace, and that we admire their leadership,” said Iarocci.

Similar Cultures. Cultural fit is the “single most important criteria” for Rentokil, whether the company has revenue of $500,000 or $50 million, said Nigh. “We must share the same fundamental values,” such as the commitment to quality service and strong personal relationships with coworkers and customers.

Iarocci agreed. Similar cultures also help the transition occur without disrupting the operation.

A culture built on quality, reputation and relationships takes “the lifetime of the company to build,” Nigh reminded.
Other criteria include mature customer lists, good standing with state and local agencies, and similar pricing.

Get Prepared. Terminix does not take a “cookie cutter” approach to mergers and acquisitions, said Terminix Finance Vice President Ted Schultz. “We look at each deal, and each deal is slightly different.

Some buyers will help owners resolve issues, though this can delay the transaction process. Arrow offers owners a third-party perspective after signing a non-disclosure agreement. “We’re happy to do it,” said Burns.

Murray encouraged owners to organize computer and hard copy files so they can detail their revenue stream going back three years. Be able to present a clean, active customer list, and identify customers by service frequency and types of treatment. Buyers also want to examine retention rates and pricing structures.

Owners also need a realistic expectation of their company’s value, said Iarocci. Although they’ve spent a lifetime building the company, they must “separate emotions from reality” when it comes to pricing.

Rollins lets owners continue to work after the transition period or nominate managers to lead the company. “We feel as though we’re easy to deal with when it comes to these transactions, because we’re not just interested in the customer list,” said Iarocci.

Arrow emphasizes the “merger” in M&A activity, said Burns, who insists on having discussions with owners in person. “We make that sure the people are taken care of first.”

- Anne Nagro

For Additional InformationDo you have questions about mergers and acquisitions in the pest management industry? Here’s a list of contacts that may be able to help.

[CONSUMER RESEARCH] Demand for Pest Management Services Increases

Features - News Coverage

Nationwide survey results released in February show that in the fourth quarter of 2010, remodeling activity was on the decline while discretionary spending on convenience and maintenance services — including pest management services — was on the rise by homeowners. The data was collected from ServiceMagic’s Q4 2010 Home Remodeling and Repair Index, containing information compiled from 1.2 million service requests received through the firm’s online marketplace from October to December of 2010, as well as results from a survey of homeowners and service professionals conducted in January of this year.

In the fourth quarter of 2010, homeowners’ service requests for convenience and maintenance services — including pest control (+30.5 percent); lawn and garden care (+21.5 percent); snow removal services (+20 percent); and handyman services (+16 percent) — were up nationally. But those same homeowners appeared to be less willing to invest in remodeling projects with demand in service requests for additions and remodeling declining 30 percent year over year nationally.

“Significant increases in convenience service categories reflect the growing trend of homeowners paying for home services that in the recent past, with tighter economic conditions, they were choosing to do on their own,” said Craig Smith, ServiceMagic’s CEO.

HOME IMPROVEMENT PLANS.
Sentiment towards remodeling activity in 2011 is optimistic with 71 percent of homeowners surveyed indicating they plan to complete a home project in 2011. However, a large majority of these homeowners have longer project timelines with more than 60 percent waiting for 12 or more weeks before beginning their project, an important consideration for PMPs providing “handyman” services. Past survey results have indicated that most homeowners planned to start new projects within six weeks.“Homeowners seem to be cautiously optimistic about investing in remodeling projects and it appears that remodeling activity will pick up towards the second and third quarters of 2011,” Smith said.

“It would have been easy early on in 2010 to hope for the ultimate recovery — perhaps back to 2007 spending levels. But we also observed that, while active, consumers behave differently now,” Smith continued. “It’s a mixed-bag recovery, some strong signs that homeowners plan to stay put for a while and want to increase their home’s live-in value. At the same time, today’s consumer is more discerning and price conscious.”

More Data AvailableVisit www.servicemagic.com to download the complete Q4 2010 Home Remodeling and Repair Index, which includes home improvement regional and city data on home project spending trends, as well as specific categories of projects that have seen increases and decreases as compared to the same quarter in the year prior.

This survey was conducted online by ServiceMagic in January 2011. The survey polled 375 service professionals and 1,050 consumers in the ServiceMagic network. ServiceMagic.com data reflects homeowners requesting a professional to hire for home improvement projects. In other words, this data reflects “do-it-for-me” projects and not “do-it-yourself” projects.

With more than 6 million requests from homeowners in 2010, ServiceMagic is a nationwide website connecting consumers with prescreened, customer-rated service professionals.